UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 33-14751-D
FIRST AMERICAN RAILWAYS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0443800
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3700 NORTH 29TH AVENUE, SUITE 202; HOLLYWOOD, FLORIDA 33020
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER (954) 920-0606
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Check whether the issuer (1) filed all reports reequired to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such report(s), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by the court. Yes No NOT APPLICABLE
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date:
AT AUGUST 5, 1997 11,144,072 SHARES OF COMMON STOCK, PAR
VALUE $.001 PER SHARE
Transitional Small Business Disclosure Format (check one): YES NO X
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
INDEX
(SIX MONTHS ENDED JUNE 30, 1997)
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a
Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
<TABLE>
<CAPTION>
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996
(UNAUDITED)
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<S> <C> <C>
ASSETS
CURRENT:
Cash $ 10,905,318 $ 7,174,020
Restricted cash 21,703 430,834
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Cash and cash items 10,927,021 7,604,854
Inventories 1,062,200 -
Prepaids and other 707,412 255,372
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Total current assets 12,696,633 7,860,226
Fixed assets, net 37,638,095 2,413,320
Deposit for acquisition - 2,000,000
Deferred loan costs and other assets, net 2,831,446 867,107
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$ 53,166,174 $ 13,140,653
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $ 805,787 $ 166,722
Accrued liabilities 1,209,952 459,561
Unearned revenue 1,653,585 -
Current maturities of long-term debt 900,000 -
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Total current liabilities 4,569,324 626,283
Long-term debt 33,611,501 8,250,682
Deferred income taxes and other long-term liabilities 8,386,876 -
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Total liabilities 46,567,701 8,876,965
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Commitments and contingencies - -
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Stockholders' equity
Preferred stock ($.001 par value, 500,000 shares authorized) - -
Common stock ($.001 par value, 100,000,000 shares authorized),
11,048,325 and 9,061,078 shares issued and outstanding 11,048 9,061
Additional paid-in capital 12,218,553 8,189,798
Accumulated deficit (5,631,128) (3,935,171)
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Total stockholders' equity 6,598,473 4,263,688
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$ 53,166,174 $ 13,140,653
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</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
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<S> <C> <C> <C>
Revenue $2,633,585 - $2,633,585 -
Cost of revenue 1,186,004 - 1,186,004 -
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Gross profit 1,447,581 - 1,447,581 -
Selling, general and administrative 525,153 - 525,153 -
Developmental of Florida Fun-Train 1,149,491 236,524 1,883,276 391,894
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Operating loss (227,063) (236,524) (960,848) (391,894)
Interest expense, net 553,418 187,461 593,019 188,085
Amortization of loan costs 92,428 121,399 142,090 121,399
Expenses from offerings not completed - 21,829 - 57,829
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Net loss $ (872,909) $ (567,213) $ (1,695,957) $ (759,207)
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Weighted average number of
common shares outstanding 9,691,663 7,736,905 9,405,875 6,193,452
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Net loss per common share $ (0.09) $ (0.07) $ (0.18) $ (0.12)
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</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
<TABLE>
<CAPTION>
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
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1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,695,957) $ (759,207)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 97,583 1,055
Amortization 159,526 121,399
Salaries and consulting fees paid in common stock 44,014 -
(Increase) Decrease in restricted cash 409,131 (829,924)
Increase in prepaids and other (429,407) (142,820)
Increase (Decrease) in accounts payable 73,681 (182,393)
Increase in accrued liabilities 111,568 21,706
Increase in inventories (304,915) -
Increase in unearned revenue 1,049,475 -
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Total adjustments 1,210,656 (1,010,977)
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Net cash used in operating activities (485,301) (1,770,184)
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Investing Activities:
Capital expenditures (5,365,785) (497,785)
Cash paid for acquisition (3,481,582) -
Increase in other assets (378,207)
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Net cash used in investing activities (9,225,574) (497,785)
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Financing Activities:
Proceeds from issuance of notes payable 16,406,500 8,695,682
Repayment of notes payable (4,567,342) (445,000)
Payment of loan costs (1,629,125) (1,087,829)
Proceeds from issuance of common stock 3,736,710 7,300,761
Payment of offering costs (504,570) -
Borrowings from related parties - 68,388
Repayments of notes payable to related parties and others - (333,388)
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Net cash provided by financing activities 13,442,173 14,198,614
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Net increase in cash 3,731,298 11,930,645
Cash at beginning of period 7,174,020 -
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Cash at end of period $ 10,905,318 $ 11,930,645
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Supplemental Disclosures:
Cash paid for interest $ 867,587 $ 125,341
Accrued fees and salaries paid in common stock 102,188 -
Prepaids paid in common stock 91,500 -
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</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENTS
The consolidated financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the consolidated
financial statements have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although the Company
believes that the disclosures made are adequate to make the information
presented not misleading. These consolidated financial statements should be read
in conjunction with the financial statements and related notes contained in the
Company's 1996 Annual Report on Form 10-KSB. Other than as indicated herein,
there have been no significant changes from the financial data published in said
report. In the opinion of Management, such unaudited information reflects all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the unaudited information shown.
Results for the interim period presented herein are not necessarily indicative
of results expected for the full year.
2. ACQUISITION
On March 13, 1997, the Company purchased all of the common stock of The Durango
& Silverton Narrow Gauge Railroad Company ("D&SNG"). The purchase price, which
aggregated approximately $16.2 million and did not result in an allocation to
goodwill, consisted of the following: (i) two promissory notes aggregating
$10.05 million which are subordinate to a purchase money loan provided by a
third-party lender in the amount of $8.5 million; (ii) 200,000 shares of the
common stock of the Company; (iii) a six-year warrant to purchase 1,610,000
shares of the Company at an exercise price of $3.50 per share; and (iv) cash of
approximately $5 million, including a $2 million deposit which was paid in
December 1996.
For financial statement purposes, the acquisition is assumed to have occurred on
March 31, 1997. The operations for the period from March 13, 1997 to March 31,
1997 are not deemed to be material.
In connection with the acquisition of D&SNG, the fair value of the assets
acquired was as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash paid (net of cash acquired) $ 5,625,574
Liabilities assumed and/or incurred 25,603,590
Common stock and warrant issued 544,900
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Fair value of assets acquired $ 31,774,064
=============
</TABLE>
6
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The acquisition was accounted for under the purchase method for accounting
purposes and based upon a preliminary allocation of the purchase price resulted
in the following significant assets acquired and liabilities assumed and/or
incurred:
<TABLE>
<CAPTION>
<S> <C>
Fixed assets $29,956,572
Inventories and other assets 1,689,087
Deferred income tax liability 8,167,159
Long-term debt 17,650,000
Other liabilities 2,868,094
</TABLE>
The Company's unaudited proforma consolidated statements of operations for the
six months ended June 30, 1997 and 1996, assuming the acquisition of D&SNG was
effected at the beginning of each such period are summarized as follows:
1997 1996
Total revenues $ 2,925,325 $ 2,722,393
Net loss $ (2,827,511) $ (1,484,604)
Loss per share $ (.30) $ (.23)
This proforma information does not purport to be indicative of the results which
may have been obtained had the acquisition been consummated on the dates
assumed.
D&SNG's business is highly seasonal; historically, at least 60% of the total
number of passengers who ride on D&SNG annually do so during the months of June,
July and August.
3. ISSUANCE OF DEBT AND EQUITY SECURITIES
On June 30, 1997, the company completed a private offering of 223.05 units of
its securities at $50,000 per unit. Each unit consists of (i) an 8% convertible
subordinated note in the principal amount of $50,000 and (ii) 5,000 shares of
Common Stock of the Company. The subordinated notes may be converted at $3.50
per share, at the option of the holders thereof, at any time during the
five-year term thereof. Investors who purchased at least 40 units ($2,000,000)
received an additional 2,500 shares (for a total of 7,500 shares) for each unit
purchased, however, the subordinated note(s) issued to these investors
contain(s) a mandatory conversion feature which may be exercised by the Company
in certain circumstances.
The Company issued a total of $11,152,500 (principal amount) in subordinated
notes and 1,465,250 shares of common stock which yielded gross proceeds and net
proceeds of $11,152,500 and approximately $9,560,000, respectively.
Additionally, the Company issued 223,050 shares of common stock as partial
compensation to the placement agent and certain subplacement agents in the
private offering. The transaction resulted in an original issue discount of
approximately $3.45 million which will be recorded as additional interest
expense over the five-year term of the subordinated notes.
7
<PAGE>
FIRST AMERICAN RAILWAYS,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. LONG-TERM DEBT
At June 30, 1997 the Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
9.17% note payable to bank, principal
and interest payable monthly through
March 2002 $ 8,282,786
10% convertible notes payable due
April, May 2001 8,235,682
8% convertible subordinated notes payable
due June 2002 less unamortized original issue
discount of $3,209,467 7,943,033
Note payable to Charles E. Bradshaw, Jr.,
interest ranging from $9.25% to 10%,
due March 2002 5,850,000
Note payable to Charles E. Bradshaw, Jr.,
interest rate is 30-day commercial paper
rate plus 650 points, due between March 1998
and March 2000 depending upon the occurrence
of certain circumstances 4,200,000
-----------
$34,511,501
Less current maturities (900,000)
-----------
$33,611,501
===========
</TABLE>
A summary of maturities by year of the above debt assuming the $4,200,000 note
payable to Charles E. Bradshaw, Jr. is paid in cash in March 2000 as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 454,000
1998 972,000
1999 1,062,000
2000 5,367,000
2001 9,530,000
2002 20,335,968
------------
$ 37,720,968
Less unamortized original issue discount (3,209,467)
------------
$ 34,511,501
============
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's consolidated financial statements present a consolidation of its
operations. This discussion supplements the detailed information presented in
the Consolidated Financial Statements and Notes thereto (which should be read in
conjunction with the financial statements and related notes contained in the
Company's 1996 Annual Report on Form 10-KSB) and is intended to assist the
reader in understanding the financial results and condition of the Company.
The Company is currently pursuing its strategy of becoming the recognized leader
in providing innovative, quality entertainment-based passenger rail service
through the development of "Fun-Trains" and the acquisition of "Scenic
Destination Railroads." The Company is currently developing its first Fun-Train
(the "Florida Fun-Train"), an entertainment-based rail service which is
anticipated to commence operations in the fall of 1997 between South and Central
Florida.
The Company has taken significant steps to commence the operation of the Florida
Fun-Train. The Company has purchased its first passenger car and entered into an
agreement for the manufacture of the remaining railcars (three of which have
been delivered, subject to acceptance by the Company, and are being utilized for
limited promotional activities); entered into the requisite track rights
agreements; selected and obtained terminal sites in the Orlando area and in
Broward County (South Florida) and arranged for the construction of a rail spur
next to the site of the southern terminal; is negotiating for the construction
of the northern terminal; entered into an agreement with National Railroad
Passenger Corporation ("Amtrak") for the operation of the Florida Fun-Train; and
entered into an agreement with Universal Studios for joint marketing efforts in
connection with Florida Fun-Train services.
The Company is also pursuing its strategy of acquiring Scenic Destination
Railroads. On March 13, 1997, the Company purchased all of the common stock of
The Durango & Silverton Narrow Gauge Railroad Company ("D&SNG"), which
aggregated approximately $16.2 million, did not result in any allocation to
goodwill and consisted of the following: (i) two promissory notes aggregating
$10.05 million which are subordinate to a purchase money loan provided by a
third-party lender in the amount of $8.5 million; (ii) 200,000 shares of the
common stock of the Company; (iii) a six-year warrant to purchase 1,610,000
shares of the Company at an exercise price of $3.50 per share; and (iv) cash of
approximately $5 million, including a $2 million deposit which was paid in
December 1996.
For financial statement purposes, the acquisition is assumed to have occurred on
March 31, 1997. The operations for the period from March 13, 1997 to March 31,
1997 are not deemed to be material. Therefore, the operations of D&SNG are
included in the Company's Statements of Operation only for the three months
ended June 30, 1997. However, the revenue, cost of revenue and selling general
and administrative expenses for the three months ended June 30, 1997 are
compared to the prior year's comparable period in Management's Discussion of
Results of Operations below to provide better insight to the results of D&SNG's
operating results despite the fact that the 1996 results of operations for D&SNG
are not included in the Company's Statements of Operations for 1996.
9
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED
TO THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996.
Revenues of $2.6 million for the second quarter of 1997 reflect an increase of
approximately $200,000 from the previous year. All of these revenues were
generated by D&SNG and the increase is due primarily to a 15% increase in ticket
prices and selective price increases in train concession implemented in 1997
partially offset by a 6% decrease in passengers from the prior year's comparable
period. The decrease in passengers was caused primarily by poor weather in April
and May and a general softness in the Colorado tourism market.
Cost of revenues of $1.2 million for the second quarter was approximately
$100,000 lower than the previous year. The decrease is due primarily to a slight
reduction in operations personnel and lower cost of concession sales.
Selling, general and administrative expenses of $525,000 for the second quarter
was approximately $100,000 lower than the comparable period primarily due to the
elimination or reduction of certain expenses aggregating approximately $225,000
following the acquisition. These expenses include the leases of a corporate
airplane and an apartment and the allocation of management fees. This saving was
partially offset by higher promotional, advertising and other marketing
expenses.
Developmental expenses of Florida Fun-Train increased by approximately $913,000
and $1,491,000, respectively, for the second quarter and first six months of
1997 as compared to the same periods for 1996. The increase is related primarily
to an addition of approximately 20 employees subsequent to June 30, 1996 and the
increase in 1997 of significantly more general and administrative expenses, i.e.
rent, insurance, promotional travel, and advertising related to the commencing
of operations for the Florida Fun-Train. The major components of the
developmental expenses for the three and six months ended June 30, 1997 were
salary and payroll tax expenses of approximately $510,000 and $878,000,
respectively and general and administrative expenses of approximately $539,000
and $805,000, respectively.
The Company's net interest expense increased by approximately $366,000 and
$405,000 for the second quarter and first six months of 1997, respectively, as
compared to the same periods in 1996. The acquisition of D&SNG resulted in
additional net interest expense of approximately $450,000 in 1997. Additionally,
the issuance by the Company of additional debt securities in June 1997 (see Note
3 of Notes to Consolidated Financial Statements) resulted in additional interest
expense of approximately $85,000 in the second quarter of 1997. These increases
were partially offset by increased amounts of interest income and capitalized
interest in the three and six months ended June 30, 1997 compared to the same
periods in 1996.
The Company reported net losses of $873,000 or $.09 per share and $1.7 million
or $.18 per share, for the second quarter and first six months of fiscal 1997,
respectively, as compared to net losses of $567,000, or $.07 per share and
$759,000, or $.12 per share, respectively, for the same periods of 1996, as a
result of the factors discussed above.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Overall, for the six months of 1997, cash increased by approximately $3.7
million primarily due to proceeds from notes payable and issuance of common
stock partially offset by capital expenditures for the Florida Fun-Train, the
acquisition of D&SNG and repayment of notes payable for D&SNG.
More specifically, for the six months ended June 30, 1997, cash flow used in
operating activities was $485,000 compared to approximately $1.8 million for the
six month period ended June 30, 1996. The improvement in 1997 was due primarily
to the acquisition of D&SNG which generated positive operating cash flow of
approximately of $1 million partially offset by higher cash usage by the Florida
Fun-Train developmental activities due to increased level of activities in
preparation of the commencement of operations (net of restricted cash
transactions).
The Company's investing activities used approximately $9.2 million in the first
six months of fiscal 1997, compared to approximately $500,000 in the first six
months of 1996. The investing activity in 1997 was principally due to capital
expenditures of approximately $5.4 million and the acquisition of D&SNG of
approximately $3.5 million in cash. The capital expenditures are primarily
payments for the construction of the railcars for the Florida Fun-Train.
For the six months period ended June 30, 1997, financing activities generated
approximately $13.4 million as compared to $14.2 million in the six months
period ended June 30, 1996. Cash flows from financing activities for 1997 were
principally due to a private placement of debt and equity securities completed
in June 1997 of approximately $9.5 million (see Note 3 of Notes to Consolidated
Financial Statements) and proceeds from a note payable used to primarily finance
the acquisition of D&SNG and repay existing notes payables (net increase of cash
of approximately $3.9 million). The Company's percentage of total debt to total
capital was 83.9% on June 30, 1997 compared to 65.9% on December 31, 1996.
The Company's future cash requirements will be significant. The Company expects
that its existing cash resources, along with external sources of cash, including
potential leasing and financing opportunities which Management believes are
available on commercially reasonable terms, will be sufficient to enable the
Company to commence operations of the Florida Fun-Train in the Fall 1997. The
Company believes that the working capital generated from the issuance in June
1997 of debt and equity securities ($9.56 million net proceeds) along with a $1
million line of credit will satisfy the Company's capital requirements for the
next twelve months.
In connection with the acquisition of D&SNG by the Company, D&SNG borrowed, and
the Company guaranteed, $8.5 million from a commercial lending institution
pursuant to a five-year term loan, portions of which were used to pay a
pre-existing lender to fund a portion of the cash required to close the
acquisition. The balance was used for working capital for D&SNG's operations
(approximately $1 million). This working capital and the funds generated from
D&SNG's operations are expected to be adequate to meet D&SNG's cash requirements
11
<PAGE>
(including capital expenditures and debt service) for 1997. There are no
material short-term or long-term commitments for capital expenditures for D&SNG;
however, the Company anticipates expenditures in 1997 for property and
equipment, but has not yet finalized its plan in this regard, and does not
expect such expenditures for D&SNG to be material. Additionally, D&SNG is
expected to incur in excess of $2 million of interest and principal payments in
1997 resulting from the $8.5 million term loan and the $10.05 million seller
financing. Although D&SNG's business and cash flow are historically seasonal in
nature with the peak season being the months of June, July and August, the peak
seasonality is not expected to have a material adverse impact on the Company's
ability to meet cash requirements from existing cash sources.
Capital expenditures and debt service in 1998 and subsequent years are expected
to be funded from the working capital generated from D&SNG operations. In the
event that the working capital from D&SNG is not adequate to fund D&SNG cash
requirements in 1998 and subsequent years, D&SNG will seek to obtain unsecured
lines of credit, or will borrow funds from the Company, if available; however,
there can be no assurance that these sources of funds will be available to D&SNG
in the future.
There can be no assurance, that operations of the Florida Fun-Train will in fact
commence as scheduled, or that unanticipated problems will not arise which will
necessitate the need for additional financing. Further, there can be no
assurance that the Company will not experience adverse changes in its business
prospects, its proposed operations, in the transportation or tourism industries,
or the U.S. economy generally.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Form 10-QSB, specifically the Management's Discussion and Analysis,
contains "FORWARD-LOOKING STATEMENTS" within the meaning of the federal
securities laws. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for "FORWARD-LOOKING STATEMENTS". In order to comply with the terms
of the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
"FORWARD-LOOKING STATEMENTS". Such factors include, among others, the following:
the timely manufacture and delivery of the railcars comprising the Florida
Fun-Train, the prompt construction of the northern and southern terminals of the
Florida Fun-Train and the timely institution of the Florida Fun-Train's
operations, the successful integration of the operations of The Durango &
Silverton Narrow Gauge Railroad into the Company's overall operations, the
successful marketing of the Company's rail services in Florida and Colorado, the
ability of the Company to obtain, from internal and external sources, sufficient
working capital to fund its operations and unscheduled repairs to the Company's
railroad equipment. In addition, the Company's business prospects are generally
susceptible to national economic conditions as well as those affecting the
Colorado and Florida tourism markets, specifically. Actual results could differ
materially from the forward-looking statements as a result of the foregoing
factors.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 3, 1997, the United States of America filed an action against D&SNG in
the United States District for the District of Colorado. This civil action
arises from a forest fire event (the "Mitchell Lakes Fire") that occurred on
July 5, 1994, along the Durango/Silverton train route and was allegedly caused
by the emission of burning particles in the exhaust from a D&SNG locomotive. The
Complaint alleges that 270 acres of forest in the San Juan National Forest were
burned. The Complaint sets forth counts for strict liability under Colorado law
and for common law negligence arising from D&SNG's alleged actions in causing
the Mitchell Lakes Fire. The United States seeks the cost of suppressing the
fire (alleged to be $555,542) along with pre and post-judgement interest,
administrative costs and penalties under federal statues and regulations.
The Company has applicable insurance coverage as well as a claim for
indemnification from the Seller of D&SNG which it believes will satisfy any
financial responsibility it may have as a result of this action. While the
Company has not been served in this action, if and when it is so served, the
Company intends to vigorously defend the action.
On July 9, 1997, Carnival Corporation ("Carnival") commenced an action against
the Company in the United States District Court for the Southern District of
Florida. The Complaint alleges that Carnival owns a "family" of federal, state
and common law service marks and trademark centered around the word "Fun" which
relate to Carnival's business activities including entertainment services (stage
shows, nightclub shows, contests, dances and parties), cruise ship services,
cruise transportation services, "on-line" services, on-board interactive
television services and various children's entertainment services. The Complaint
also alleges that the Company plans to use the name Fun Train in connection with
the proposed operations of the Florida Fun-Train, which train will offer
entertainment-based passenger rail transportation services and that additional
Fun Trains are anticipated. The Complaint further alleges that the Company is
developing, promoting and marketing its Fun Train in the same marketing areas
and channels of trade as Carnival.
The Complaint alleges federal (Lanham Act) trademark infringement, federal,
state and common law trademark dilution, common law unfair competition and false
designation of origin, description and representation of services under the
Lanham Act. The injunctive relief sought in the Complaint includes a request for
a preliminary and permanent injunction enjoining the Company from (i) using the
Fun Train mark (and any related "Fun" marks), (ii) holding out the Company's
services or products as sponsored by or affiliated with Carnival, (iii)
committing acts of infringement or dilution of Carnival's marks, and (iv)
otherwise unfairly competing. In addition, the Complaint seeks various types of
relief to implement the foregoing, Carnival also
13
<PAGE>
seeks an accounting for lost profits and an unspecified claim for damages and
pursuant to federal statute, punitive damages (in an unspecified amount).
Although not determinative, the Company has received a registered mark in the
state of Florida for "Florida Fun-Train." In addition, beginning in April 1996,
the Company has applied for the federal registration of "Fun-Train" mark and is
currently pursuing this application. Although the federal application has been
published by the Patent and Trademark Office for public comment, Carnival has
indicated that it may oppose the application. The issuance of a federal
registration to the Company should not materially affect any prior common law
rights, if any, Carnival may have with regard to the use of the "Fun" mark in
connection with rail transportation. The Company does not believe its "Florida
Fun-Train" and "Fun-Train" usage infringe upon any rights of Carnival. In the
aforementioned action, the Company has answered the Complaint by denying the
material allegations thereof. Further, the Company has asserted counterclaims
against Carnival which seek to (i) declare that Carnival's alleged "fun" marks
have lost their significance as marks and have been abandoned under the Lanham
Act, and (ii) that the term "fun" is generic and has not acquired
distinctiveness in connection with Carnival's business. With regard to the
counterclaims, the Company has sought the following relief: cancellation of
various Carnival "fun" marks, directing Carnival to withdraw various
applications for "fun" marks, as well as declaration that the term "fun" is
generic and/or merely descriptive, that Carnival has no exclusive right to such
term, and that the company's use of the word "fun" in Fun-Train does not
infringe or dilute any Carnival's marks or constitute an act of infringement.
ITEM 2. CHANGES IN SECURITIES
On June 30, 1997, the Company completed a private offering of units of its
securities. Each unit consisted of a $50,000 (principal amount) convertible
subordinated note (the "Note(s)") and 5,000 shares of common stock; investors
purchasing $2 million or more of units received an additional 2,500 shares per
unit purchased. A total of 29.25 units (an aggregate of $1,462,500 in Notes and
168,750 shares) were sold pursuant to Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Act"), to the following "accredited
investors" as that term is defined in Regulation D:
Aeron Marine Shipping Co.
The Eli S. Franco and Carol A. Franco Revocable Family Living Trust
Lancer Partners, L.P.
Chase Manhattan Bank & Louise Mallory as Trustees
for the U/A Phillip R. Mallory dtd 11/16/75
Sid Paterson
The Rogoff Family Trust dtd 6/18/96
C.W. Spelke
Fruit of the Loom, Inc.
Richard M. Weiss & Gail L. Weiss JTWROS
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Thomas A. Weiss & Ellen Weiss JTWROS
Delaware Charter Cust., Robert Zelinka IRA
Ruth Zelinka
Leonard Gordon
Edward Haymas
Strear Foods Company
Caribou Bridge Fund, LLC
Emanon Partners
Thomas P. Schmidt
In addition, an aggregate of 193.8 units were sold to "non-U.S. persons" in
"offshore transactions" pursuant to Regulation S, as promulgated under the Act.
In connection with the Regulation D and S sales described above, the placement
agent for these transaction, International Capital Growth, L.L.C., along with an
affiliate thereof, received an aggregate of $1,335,300 in commissions (including
non-accountable expenses) and were issued 222,550 shares of the Company's common
stock. Also in connection therewith, Pellet Investments received $3,000 in
commissions (including non-accountable expenses) and 500 shares as sub-placement
agent.
On May 9, 1997, the Company issued 4,297 shares to Mazin Kamauna pursuant to his
converted 10% convertible secured note that was previously sold to him as a
"non-U.S. person" in an "offshore transaction" in a private placement of
securities made pursuant to Regulation S in April 1996. The principal amount of
the notes ($15,000) along with accrued interest was convertible at $3.50 per
share. No commissions were paid in connection with this conversion.
On March 13, 1997, a total of $9,700 shares of common stock were sold to
Atlantic Equity Corporation (an affiliate of NationsBank, N.A., (South)), the
Company's primary institutional lender. These shares were issued pursuant to
Section 4(2) of the Act and as partial consideration for an $8.5 million term
loan made by NationsBank to the Company's subsidiary, The Durango & Silverton
Narrow Gauge Railroad Company. No commissions were paid in connection therewith.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of shareholders of the Company was held on June 7, 1997. The
following actions were taken:
An amendment to the Articles of Incorporation to provide for a classified Board
of Directors consisting of three classes of directors each to be composed of up
to three directors and each elected for a three-year term which amendment was
approved by approximately 56.1% of the outstanding shares of common stock with
5,231,603 in favor; 10,707 against and 106,163 abstaining.
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The following eight directors were elected to three classes of directorship,
each of which received the same amount of votes consisting of 5,614,418 in
favor, 10,870 against and 500 abstaining.
CLASS I:
Charles E. Bradshaw, Jr.
Thomas G. Rader
CLASS II:
Albert B. Aftoora
Allen C. Harper
Glenn P. Michael
CLASS III:
Raymond Monteleone
David H. Rush
Luigi Salvaneschi
The appointment of BDO Seidman, LLP as independent auditors was approved with
5,519,250 voting in favor, none against and 106,538 abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Exhibit 4 - Form of Convertible Subordinated Note
Exhibit 27 - Financial Data Schedule (EDGAR version only)
(b) REPORTS ON FORM 8-K:
On May 13, 1997, the Company filed a Current Report on Form
8-K/A, amending Form 8-K dated March 28, 1997, to supply
financial information with respect to the acquisition of The
Durango & Silverton Narrow Gauge Railroad from Charles E.
Bradshaw, Jr. (see Note 2 of Notes to Consolidated Financial
Statements).
On each of June 17, 1997, June 18, 1997, and July 10, 1997,
the Company filed Form 8-Ks announcing the sale of debt and
equity securities pursuant to Regulation D and Regulation S,
each as promulgated under the Securities Act of 1933, as
amended (see Note 3 of Notes to Consolidated Financial
Statements).
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this Form 10-QSB report to be signed on its behalf by the undersigned
hereunto duly authorized.
FIRST AMERICAN RAILWAYS, INC.
By: /s/ Allen C. Harper
------------------------------------------
Allen C. Harper, Chairman of the
Board of Directors and Chief Executive Officer
By: /s/ Donald P. Cumming
-----------------------------------------
Donald P. Cumming, Vice President
and Acting Chief Financial Officer
(Principal Financial Officer)
DATED: August 12, 1997
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EXHIBIT INDEX
Exhibit
4 - Form of Convertible Subordinated Note
27 - Financial Data Schedule
EXHIBIT 4
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES
LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
HYPOTHECATED, PLEDGED, OR OTHERWISE DISPOSED OF IN THE UNITED STATES OR TO U.S.
PERSONS EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER,
WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS
CORPORATION, IS AVAILABLE.
FIRST AMERICAN RAILWAYS, INC.
CONVERTIBLE SUBORDINATED NOTE
$_________ _____ ___, 1997
NEW YORK, NEW YORK
FOR VALUE RECEIVED, First American Railways, Inc., a Nevada corporation
(the "Company"), promises to pay to __________________ (the "Holder") or
registered assigns, the principal amount of ______________________ ($______),
and to pay interest (computed on the basis of a 360-day year) (a) on the unpaid
principal amount at the rate of eight percent (8%) semiannually on June 30th and
December 31st, commencing on December 31, 1997 (each, an "Interest Payment
Date") and (b) to the extent permitted by law on any overdue payment of the
principal amount at the rate of twelve percent (12%) per annum. Principal and
accrued but unpaid interest hereunder shall be due and payable on demand on or
after the Maturity Date (as defined in SECTION 5 hereof), unless converted by
the Holder in accordance with SECTION 6 hereof.
Payments of principal and interest shall be made in lawful money of the
United States of America by check and mailed to the address of the Holder
specified in Section 10(d).
This Note is one of several convertible subordinated notes
(collectively, the "Notes") offered by the Company (the "Offering") to several
holders (collectively, the "Holders") in the form of units along with shares of
common stock of the Company, $.001 par value per share (the "Common Stock"),
pursuant to a Confidential Private Offering Memorandum, dated May 1997, together
with all amendments thereof and supplements and exhibits thereto (the
"Memorandum"). This Note may be held by International Capital Growth, Ltd., the
Company's placement agent in connection with the Offering, any sub-placement
agents or their respective officers, employees and affiliates.
<PAGE>
This Note is subject to the following terms and conditions:
1. NOTE SUBORDINATION
The indebtedness evidenced by this Note is subordinate and subject in
right of payment as to principal and interest to the prior payment in full of
all principal, premium, if any, and interest on all indebtedness of the Company,
regardless of when incurred, including indebtedness incurred after the date
hereof, for money borrowed from any person or entity ("Senior Debt"). Upon
maturity of any Senior Debt, payment in full must be made on such Senior Debt
before any payment is made on or in respect of this Note. During the continuance
of any default with respect to any Senior Debt entitling the holder thereof to
accelerate the maturity thereof, or if any such default would be caused by any
payment upon or in respect of this Note, no payment may be made by the Company
upon or in respect of the Notes. Upon any distribution of assets of the Company
in any dissolution, winding up, liquidation or reorganization of the Company,
payment of the principal of and premium, if any, and interest on the Notes will
be subordinated to the prior payment in full of all Senior Debt. (Such
subordination will not prevent the occurrence of any event of default, as set
forth in section 2 below.) The holder of this Note, by accepting the same,
agrees to and shall be bound by the subordination provisions hereof and invites
each present and any future holder of Senior Debt now or hereafter outstanding
to rely thereon.
2. DEFAULT
(a) DEFAULT. The occurrence of any one or more of the following events
shall constitute an event of default (an "Event of Default") hereunder:
(i) if the Company shall default in the punctual payment
of any sum payable with respect to, or in the
observance or performance of any of the agreements,
promises, covenants, terms and conditions of any of,
the Notes.
(ii) if any warranty, representation or statement of
fact made herein by the Company is false or
misleading in any material respect when made;
(iii) if the Company or any significant subsidiary, as
defined in Rule 405 of the Rules and Regulations
under the Securities Act of 1933, as amended
("Significant Subsidiary") shall be dissolved or
liquidated or any proceeding for dissolution or
liquidation of the Company or any Significant
Subsidiary is commenced or the Company or any
Significant Subsidiary fails to maintain its
corporate existence;
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(iv) if the Company or any Significant Subsidiary
becomes insolvent (however defined or evidenced) or
makes an assignment for the benefit of creditors;
(v) if there shall be filed by or against the Company
or any Significant Subsidiary any petition for any
relief under the bankruptcy laws of the United
States now or hereafter in effect or any proceeding
shall be commenced with respect to the Company or
any Significant Subsidiary under any insolvency,
readjustment of debt, reorganization, dissolution,
liquidation or similar law or statute of any
jurisdiction now or hereafter in effect (whether at
law or in equity), provided that in the case of any
involuntary filing or the commencement of any
involuntary proceeding against the Company or any
Significant Subsidiary such proceeding or petition
shall have continued undismissed and unvacated for
at least 60 days;
(vi) if the usual business of the Company or any
Significant Subsidiary shall cease or be terminated
or suspended;
(vii) if any proceeding, procedure or remedy
supplementary to or in enforcement of judgment
shall be commenced against, or with respect to any
property of, the Company or any Significant
Subsidiary; or
(viii) if any petition or application to any court or
tribunal, at law or in equity, be filed by or
against the Company or any Significant Subsidiary
for the appointment of any receiver or trustee for
the Company or any Significant Subsidiary or any
part of the property of the Company or any
Significant Subsidiary, provided that in the case
of any involuntary filing against the Company or
any Significant Subsidiary, such proceeding or
appointment shall have continued undismissed and
unvacated for at least 60 days.
(b) REMEDIES UPON DEFAULT. If any Event of Default shall occur for any
reason, then and in any such event, in addition to all rights and remedies of
the Holder under applicable law or otherwise, all such rights and remedies being
cumulative, not exclusive and enforceable alternatively, successively and
concurrently, the Holder may, at its option, declare any or all amounts owing
under this Note, to be due and payable, whereupon the then unpaid balance
hereof, together with all interest accrued thereon, shall forthwith become due
and payable, together with interest accruing thereafter at the then applicable
interest rate
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<PAGE>
stated above until the indebtedness evidenced by this Note is paid in full, plus
the costs and expenses of collection hereof, including, but not limited to,
attorney's fees and legal expenses.
(c) THE COMPANY'S WAIVERS. The Company (i) waives diligence, demand,
presentment, protest and notice of any kind, (ii) agrees that it will not be
necessary for the Holder to first institute suit in order to enforce payment of
this Note and (iii) consents to any one or more extensions or postponements of
time of payment, release, surrender or substitution of collateral security, or
forbearance or other indulgence, without notice or consent. The pleading of any
statute of limitations as a defense to any demand against the Company is hereby
expressly waived by the Company.
(d) CERTAIN OBLIGORS. The Holder may proceed against the Company and
any guarantors or endorsees hereof in such order and manner as the Holder may
choose. None of the rights of the Holder shall be waived or diminished by any
failure or delay in the exercise thereof.
3. COVENANTS. The Company covenants and agrees that, so long as
this Note is outstanding and unpaid:
(a) PAYMENT OF NOTE. The Company will punctually pay or cause to be
paid the principal, premium, if any, and Interest on this Note at the dates and
places and in the manner specified herein. Any sums required to be withheld from
any payment of principal, premium, if any, or Interest on this Note by operation
of law or pursuant to any order, judgment, execution, treaty, rule or regulation
may be withheld by the Company and paid over in accordance therewith. In the
event any restriction is placed upon payment of principal, premium, if any, or
Interest by virtue of a currency or monetary control law, rule or regulation of
the United States Federal Government, as set forth in a written notice delivered
to the Holder within thirty (30) days after the imposition of such a
restriction, such payments shall be deposited to the account of the payee in a
bank, trust company or other financial institution, as directed by the payee.
Such payment or deposit will be deemed payment to the Holder.
Nothing in this Note or in any other agreement between the Holder and
the Company shall require the Company to pay, or the Holder to accept, interest
in an amount which would subject the Holder to any penalty or forfeiture under
applicable law. In the event that the payment of any charges, fees or other sums
due under this Note or provided for in any other agreement between the Company
and the Holder are or could be held to be in the nature of interest and would
subject the Holder to any penalty or forfeiture under applicable law, then IPSO
FACTO the obligations of the Company to make such payment to the Holder shall be
reduced to the highest rate authorized under applicable law and, in the event
that the Holder shall have ever received, collected, accepted or applied
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<PAGE>
as interest any amount in excess of the maximum rate of interest permitted to be
charged by applicable law, such amount which would be excess interest under
applicable law shall be applied first to the reduction of principal then
outstanding, and, second, if such principal amount is paid in full, any
remaining excess shall forthwith be returned to the Company.
(b) MAINTENANCE OF CORPORATE EXISTENCE; MERGER AND CONSOLIDATION. The
Company will at all times cause to be done all things necessary or appropriate
to preserve and keep in full force and effect its corporate existence and the
corporate existence of any Significant Subsidiary and all of its rights and
franchises and shall not consolidate with or merge into any other corporation or
transfer all or substantially all of its assets to any person unless (i) the
corporation formed by such consolidation or into which the Company is merged or
to which the assets of the Company are transferred is a corporation that
expressly assumes all of the obligations of the Company under this Note and (ii)
after giving effect to such transaction, no Event of Default and no event which,
after notice or lapse of time, or both, would become an Event of Default, shall
have occurred and be continuing.
(c) MAINTENANCE OF PROPERTIES. The Company will reasonably maintain in
good repair, working order and condition, reasonable wear and tear excepted, its
properties and other assets, and those of its Significant Subsidiaries, and from
time to time make all necessary or desirable repairs, renewals and replacements
thereto.
(d) PAYMENT OF TAXES. The Company will use its best efforts to pay or
discharge or cause to be paid, set aside for payment or discharge, before the
same shall become delinquent, all taxes, assessments and governmental charges
levied or imposed upon the Company or upon its income, profits or property;
provided, that the Company shall not be required to pay or discharge or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount or
validity is being contested in good faith by appropriate proceedings.
(e) COMPLIANCE WITH STATUTES. The Company will and will cause its
Significant Subsidiaries to comply in all material respects with all applicable
statutes and regulations of the United States of America and of any state or
municipality, and of any agency thereof, in respect of the conduct of business
and the ownership of property by the Company and its Significant Subsidiaries;
provided, that nothing contained in this SECTION 3(e) shall require the Company
or a Significant Subsidiary to comply with any such statute or regulations so
long as its legality or applicability shall be contested in good faith.
(f) REPORTS; FINANCIAL STATEMENTS; NO ADVERSE CHANGE. The
financial statements included in the Memorandum did not contain any
untrue statement of a material fact or omit to state a material
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<PAGE>
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not misleading.
The financial statements included in the Memorandum (including the related notes
and schedules) fairly present, as of December 31, 1996, the financial position
and results of operations for the periods set forth therein (subject, in the
case of unaudited statements, to the omission of certain notes not ordinarily
accompanying such unaudited financial statements, and to normal year-end audit
adjustments which are not material in amount or effect), in each case in
accordance with generally accepted accounting principles consistently applied
during the period involved. Since December 31, 1996, there has been no material
adverse change in the Company's or a Significant Subsidiary's business,
properties, financial condition or results of operations, except as disclosed in
the Memorandum.
(g) RESTRICTIONS ON DIVIDENDS, REDEMPTIONS, ETC. The Company will not
(i) declare or pay any dividend or make any other distribution of the Company,
except dividends or distributions payable in equity securities of the Company,
or (ii) purchase, redeem or otherwise acquire or retire for value any equity
securities of the Company, except (A) equity securities acquired upon conversion
thereof into other equity securities of the Company and (B) any equity security
issued to employees, directors of others performing services in accordance with
agreements providing for such repurchase at original cost upon termination of
employment, membership on the Board of Directors or other affiliation with the
Company.
(h) TRANSACTIONS WITH AFFILIATES. Neither the Company nor any of its
Significant Subsidiaries will itself, and will not permit any of their
respective officers or directors, or holder of 5% or more of the Company's
Common Stock, to engage in any transaction of any kind or nature with any
affiliate of the Company or any Significant Subsidiary, other than transactions
with any wholly-owned subsidiary of the Company or any Significant Subsidiary or
pursuant to the terms of any agreement existing as of the date hereof between
the Company or any Significant Subsidiary and any affiliate of the Company or
any Significant Subsidiary, unless such transaction, or in the case of a course
of related or similar transactions or continuing transactions, such course of
transactions or continuing transactions is or are upon terms which are fair to
the Company or any Significant Subsidiary and which are reasonably similar to,
or more beneficial to the Company or any Significant Subsidiary than the terms
deemed likely to occur in similar transactions with unrelated persons under the
same circumstances.
4. NO PREPAYMENT. This Note may not be prepaid in whole or in part.
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5. MATURITY
If this Note is not converted at the option of the Holder in accordance
with SECTION 6 hereof, the principal amount of this Note, together with accrued
but unpaid interest, shall be due and payable on demand on ____________, 2002
(the "Maturity Date").
6. CONVERSION
All, but not less than all, of the principal amount of this Note,
together with accrued but unpaid interest, may be converted into shares of
Common Stock (the "Note Shares") at the option of the Holder at any time on or
prior to the Maturity Date, subject to the terms and conditions set forth in
this SECTION 6. Upon conversion into Note Shares, the principal amount and
accrued but unpaid interest on this Note shall be discharged.
(a) CONVERSION PRICE. The number of Note Shares into which this Note
may be converted shall be determined by dividing the aggregate amount of
principal and accrued but unpaid interest outstanding on this Note on the
Conversion Date (as defined below) by three dollars and fifty cents ($3.50)
(subject to adjustment under certain circumstances) (the "Conversion Price").
(b) METHOD OF CONVERSION. Before the Holder shall be entitled to
receive Note Shares upon the conversion of this Note, the Holder shall surrender
this Note and deliver a Notice of Conversion (in the form attached hereto as
EXHIBIT A) to the office of the Company or its designated agent. The Notice of
Conversion shall state therein the amount(s) in which the certificate(s) for
Note Shares are to be issued. The time of conversion (the "Conversion Date")
shall be the close of business on the first business day following the date on
which the Company receives the Notice of Conversion. Interest on Notes converted
ceases to accrue on and after the date of the Notice of Conversion.
(c) ISSUANCE OF NOTE SHARES. The Company shall, as soon as practicable
after surrender of this Note and receipt of the Notice of Conversion, but in no
event more than three (3) business days thereafter, issue and deliver to the
Holder, a certificate(s) for the number of Note Shares to which the Holder shall
be entitled as aforesaid.
(d) NO FRACTIONAL SHARES. No fractional Note Shares shall be issuable
upon conversion of this Note. If the conversion of this Note would result in the
issuance of a fractional share of Common Stock, such fractional share shall be
rounded up to the nearest whole share and issued to the Holder.
(e) ADJUSTMENT OF CONVERSION PRICE; MERGER.
7
<PAGE>
(i) If the Company at any time or from time to time
while this Note is issued and outstanding shall
declare or pay, without consideration, any dividend
on the Common Stock payable in Common Stock, or
shall effect a subdivision of the outstanding
shares of Common Stock into a greater number of
shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a
dividend in Common Stock or in any right to acquire
Common Stock), or if the outstanding shares of
Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number
of shares of Common Stock, then the Conversion
Price in effect immediately before such event
shall, concurrently with the effectiveness of such
event, be proportionately decreased or increased,
as appropriate. If the Company shall declare or
pay, without consideration, any dividend on the
Common Stock payable in any right to acquire Common
Stock for no consideration, then the Company shall
be deemed to have made a dividend payable in Common
Stock in an amount of shares equal to the maximum
number of shares issuable upon exercise of such
rights to acquire Common Stock.
(ii) If the Common Stock shall be changed into the same
or a different number of shares of any other class
or classes of stock, whether by capital
reorganization, reclassification or otherwise
(other than a subdivision or combination of shares
provided for in SECTION 6(e)(i)), the Conversion
Price then in effect shall, concurrently with the
effectiveness of such reorganization or
reclassification, be proportionately adjusted so
that the Note Shares shall be convertible into, in
lieu of the number of shares of Common Stock which
the Holder would otherwise have been entitled to
receive, a number of shares of such other class or
classes of stock equivalent to the number of shares
of Note Shares that would have been subject to
receipt by the Holder upon payment of Note Shares
on this Note immediately before that change.
(iii) In case of any consolidation or merger of the
Company with any other corporation, limited
liability company or any other entity (each such
transaction, a "Merger"), the corporation formed by
the Merger shall succeed to the covenants,
stipulations, promises and the agreements contained
in this Note. In the event of a Merger, the
Company shall make appropriate provisions so that
the Holder shall have the right thereafter to
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<PAGE>
convert this Note into the kind and amount of
securities receivable upon such Merger by a Holder of
the number of securities into which this Note might
have been converted immediately prior to a Merger.
The above provisions shall similarly apply to
successive Mergers.
(iv) Upon the occurrence of each adjustment or
readjustment of any Conversion Price pursuant to
this SECTION 6(e), the Company at its expense shall
promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and
furnish to the Holder a notice setting forth such
adjustment or readjustment and showing in detail
the facts upon which such adjustment or
readjustment is based.
(f) RESERVATION OF STOCK. The Company shall at all times reserve and
keep available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion of this Note into Note Shares, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all of the Notes; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all of the Notes then, the Company will take such corporate
action as may be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose,
including without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to its Articles of
Incorporation.
(g) ISSUE TAXES. The Company shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of Note Shares;
provided, that the Company shall not be obligated to pay any transfer taxes
resulting from any transfer requested by the Holder in connection with any such
conversion.
7. REGISTRATION: REGISTRATION OF TRANSFER AND EXCHANGE OF THIS
NOTE
(a) The Company shall keep or cause to be kept a note register (the
"Note Register") for the Notes in which, subject to such reasonable regulations
as it may prescribe, the Company shall provide for the registration of the Notes
and the registration of transfers of the Notes.
(b) Subject to the restrictions on transfer set forth herein, this Note
may be exchanged, at the option of each Holder, for other Notes in any
authorized denominations, of a like aggregate principal amount, upon surrender
of this Note to be exchanged at
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the offices of the Company or its designated agent (either, the "Registrar").
(c) All Notes issued upon any registration of transfer or exchange of
this Note shall be valid obligations of the Company, evidencing the same debt,
and entitling the Holder to the same benefits under this Note.
(d) Every Note presented or surrendered for registration of transfer or
exchange shall be duly endorsed by, or be accompanied by a written instrument of
transfer in form satisfactory to the Registrar, duly executed by the Holder
thereof or such Holder's attorney duly authorized in writing.
(e) No charge shall be made to a Holder for any registration of
transfer or exchange of Notes.
(f) Prior to due presentment for registration of transfer of any Note,
the Company may treat the person in whose name any Note is registered (as of the
day of determination) as the Holder for the purpose of receiving payments of
principal of and interest on such Note and for all other purposes, and neither
the Company nor any agent of the Company shall be affected by notice to the
contrary.
8. OTHER PROVISIONS RELATING TO RIGHTS OF THE HOLDER OF THIS NOTE
(a) RIGHTS OF THE HOLDER OF THIS NOTE. This Note shall not entitle the
Holder to any of the rights of a shareholder of the Company, including, without
limitation, the right to vote, to receive dividends and other distributions, or
to receive any notice of, or to attend, meetings of shareholders or any other
proceedings of the Company. This SECTION 8(a) shall not affect the rights of the
Holder in its capacity as a shareholder of the Company upon conversion of this
Note and issuance to the Holder of Note Shares pursuant to SECTION (6) hereof.
(b) LOST, STOLEN, MUTILATED OR DESTROYED NOTE. If this Note shall be
mutilated, lost, stolen, or destroyed, the Company shall execute and deliver, in
exchange and substitution for and upon cancellation of a mutilated Note, or in
lieu of or in substitution for a lost, stolen, or destroyed Note, a new Note for
the principal amount of this Note so mutilated, lost, stolen, or destroyed but
only upon receipt of evidence (which may consist of a signed affidavit of the
Holder), of such loss, theft, or destruction of such Note, and of the ownership
thereof, and indemnity, if requested, all reasonably satisfactory to the
Company.
9. SECURITIES LAW COMPLIANCE; REGISTRATION RIGHTS
(a) RESTRICTIONS ON TRANSFER. The Holder and the Company understand
that each of (i) the Holder's right to convert this Note
10
<PAGE>
and (ii) the ability of the Company to issue the Note Shares and are subject to
full compliance with the provisions of all applicable securities laws and the
availability thereunder of an exemption from registration, and that the
certificates evidencing the Note Shares, shall bear a legend substantially to
the effect of the legend on the first page hereof.
(b) COMPLIANCE WITH LAWS. The Holder agrees to comply with all
applicable laws, rules and regulations of all federal and state securities
regulators, including but not limited to, the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc., and applicable
state securities regulators with respect to disclosure, filings and any other
requirements resulting in any way from the issuance of this Note.
10. OTHER MATTERS
(a) BINDING EFFECT; ASSIGNMENT. The provisions of this Note shall be
binding upon and inure to the benefit of the parties hereto and the successors
and assigns of the Company.
(b) FURTHER ACTIONS. At any time and from time to time, the Company and
the Holder agree, without further consideration, to take such actions and to
execute and deliver such documents as the other may reasonably request to
consummate the transactions contemplated in this Note.
(c) MODIFICATION; WAIVER. This Note sets forth the entire understanding
of the Company and the Holder with respect to the subject matter hereof and
supersedes all existing agreements between them concerning such subject matter.
This Note may be amended, modified, superseded, canceled, renewed or extended,
and the terms hereof may be waived, only by a written instrument signed by the
Company and Holders of at least fifty-one percent (51%) in principal amount of
the Notes at the time outstanding; provided, however, that the consent of a
Holder shall be required to modify the terms of this Note affecting the payment
of principal amount of, or interest on, such Holder's Note or the term of such
Holder's Note. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of
any other breach of such provision or of any breach of any other provision of
this Note. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Note on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Note. No delay on the
part of any party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof or hereof, nor shall any waiver on the part of any
party of any right, power or privilege hereunder preclude any other or further
exercise hereof or the exercise of any other right, power or privilege
hereunder. Any waiver must be in writing. The rights and remedies provided
herein are cumulative
11
<PAGE>
and are not exclusive of any rights or remedies which any party may
otherwise have at law or in equity.
(d) NOTICES. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or delivered against receipt if to (i) the Company, to
First American Railways, Inc., 3700 North 29th Avenue, Suite 202, Hollywood,
Florida 33020, and (ii) the Holder to such Holder at their last address as shown
on the Note Register (or to such other address as the party shall have furnished
in writing in accordance with the provisions of this SECTION 10(d)). Any notice
or other communication given by certified mail shall be deemed given at the time
of certification thereof, except for a notice changing a party's address which
shall be deemed given at the time of receipt thereof.
(e) SEVERABILITY. If any provision of this Note is invalid, illegal, or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. The rate of interest
on this Note is subject to any limitations imposed by applicable usury laws.
(f) HEADINGS. The headings in this Note are solely for convenience of
reference and shall be given no effect in the construction or interpretation of
this Note.
(g) GOVERNING LAW. This Agreement shall be governed by and construed in
all respects under the laws of the State of New York, without reference to its
conflict of laws rules or principles. Any suit, action, proceeding or litigation
arising out of or relating to this Agreement shall be brought and prosecuted in
such federal or state court or courts located within the State of New York as
provided by law. The parties hereby irrevocably and unconditionally consent to
the jurisdiction of each such court or courts located within the State of New
York and to service of process by registered or certified mail, return receipt
requested, or by any other manner provided by applicable law, and hereby
irrevocably and unconditionally waive any right to claim that any suit, action,
proceeding or litigation so commenced has been commenced in an inconvenient
forum.
(h) DUE AUTHORIZATION. The execution and delivery of this Note and the
consummation of the transactions contemplated herein have been authorized by the
Board of Directors of the Company and by any necessary vote or with the consent
of the shareholders of the Company.
12
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be executed on
its behalf by its Chairman of the Board of Directors thereunto duly authorized.
FIRST AMERICAN RAILWAYS, INC.
BY:____________________________
ALLEN C. HARPER
CHAIRMAN OF THE BOARD OF DIRECTORS
ATTEST:
- -----------------------------
RAYMOND MONTELEONE, PRESIDENT
13
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
The undersigned being the holder of the attached Convertible
Subordinated Note(s) (the "Note(s)") due the Maturity Date (as defined in the
Note) of First American Railways, Inc. (the "Corporation"), hereby exercises the
option to convert the Note(s) into Note Shares (as defined in the Note(s)) in
accordance with the terms of the Note(s).
The undersigned directs that the Note Shares be issued in the name of
the Holder of the attached Note and delivered as soon as practicable and in
accordance with the provisions of the Note(s) to:
Full address: ________________________________________
________________________________________
________________________________________
________________________________________
Date: ________________________
By: ________________________
Name:
14
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<PERIOD-START> JAN-01-1997
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